The following item is a Letter of Intent of the government of Malawi, which describes
the policies that Malawi intends to implement in the context of its request for financial support
from the IMF. The document, which is the property of Malawi, is being made available on the
IMF website by agreement with the member as a service to users of the IMF website.

During Malawi's Enhanced Structural Adjustment Facility (ESAF) arrangement covering the
period 1995-99, Malawi made progress in liberalizing its economy and implementing structural
reforms that were aimed at laying a sound basis for sustainable growth. However, external shocks
and inconsistent implementation of monetary and fiscal policies disrupted our macroeconomic
stabilization efforts. These difficulties were compounded by uncertainty about the timing of
disbursements from donors who provide crucial support for the Malawi economy. Inflation
remains high and growth performance below expectations.

The poorest segments of our society have suffered most from macroeconomic instability and
slow growth. We have therefore formulated and started executing a strengthened stabilization
program with the aim of alleviating and reducing poverty and promoting equitable growth. Our
objectives are outlined in our interim Poverty Reduction Strategy Paper (PRSP) and the elements
of an economic program for 2000-01 are described in the attached memorandum on economic
policies.

We are requesting support from the Fund under a three-year Poverty Reduction and Growth
Facility (PRGF) arrangement in the amount of SDR 45.11 million (65 percent of quota) and are
seeking debt relief under the enhanced HIPC Initiative.

While we believe that the policies and our economic objective measures set forth in the
attached memorandum are adequate to achieve our economic objectives over the next three years,
we stand ready to take any additional measures that may prove necessary for this purpose. During
the period of the PRGF, we will not, without Fund approval, introduce new or intensify existing
restrictions on payments and transfers for current international transactions, nor introduce any
multiple currency practice, conclude any bilateral payments agreements that are inconsistent with
Article VIII of the Fund's Articles of Agreement, nor introduce or intensify import restrictions for
balance of payments reasons. We will also consult with the Fund on the adoption of any
additional measures that may be appropriate, either at our own initiative or at the request of the
Managing Director. In addition, after the period covered by the first annual arrangement and
while Malawi has outstanding financial obligations to the Fund arising from loans granted under
this arrangement, Malawi will consult with the Fund periodically, at our own initiative or
whenever the Managing Director requests such a consultation, on Malawi's economic and
financial policies. Malawi will provide the Trustee with such information as the Trustee requests
in connection with the progress of Malawi in implementing the policies and reaching the
objectives of the program supported by the arrangement.

I. Background

1. Since the 1995-99 Enhanced Structural Adjustment Facility (ESAF)
arrangement was completed in October 1999, Malawi's economic performance has been
mixed. Growth has been moderate, with GDP expected to rise by 3.2 percent between 1999 and
2000. The 12-month increase in consumer prices fell to 22 percent in June, but has since
rebounded to 35 percent. The fiscal deficit, including grants, in financial-year 1999/2000
was cut to 5.0 percent of GDP from 5.5 percent in 1998/99 while the rate of growth in
broad money was 37.5 percent in the year to September 2000, compared with 29.7 percent
a year earlier.

2. Structural and economic reforms have been extended. The importation of
petroleum products has been fully liberalized, the intervention of the National Food Reserve
Agency (NFRA) through the "maize price" band has been abandoned, revenue
collectionand administration have been improved, and the Malawi Revenue Authority
(MRA) has been established.

3. The government now intends to consolidate progress under earlier ESAF
programs by seeking support under the Poverty Reduction and Growth Facility (PRGF). This will
help to advance the goals laid out in the interim poverty reduction strategy paper, which will be
elaborated next year in a full poverty reduction strategy paper (PRSP).

II. Challenges and Strategies for the Medium-Term

A. Challenges Ahead

4. Despite progress on structural reform, Malawi faces many daunting tasks.
The biggest challenge is to achieve a lasting reduction in poverty, and macroeconomic
stabilization is an essential precondition.

5. High growth rates and poverty reduction will be achieved only if Malawi
can address some fundamental weaknesses:

Private saving and capital formation rates are inadequate.

Lapses in fiscal discipline have led to monetary expansion and high real interest
rates.

Public expenditure monitoring and control have been weak.

There have been substantial and unwarranted swings in economic policy.

The formal sector of the economy of Malawi is still dominated by
oligopolies.

Land issues continue to constrain agricultural output.

The momentum of civil service reform has declined.

Accountability and sound governance have yet to be improved.

International competitiveness is hampered by the high cost of utilities and domestic and
international transportation.

There is overdependence on foreign financial assistance.

Statistics are not of sufficient quality or timeliness.

B. Medium-Term Objectives and
Strategy

6. Under the PRGF arrangement, Malawi will seek to attain, by the last year of
the program, sustainable real GDP growth of at least 4.5 percent; an inflation rate of
5.0 percent; gross official external reserves that would cover at least 4.8 months imports
of goods and nonfactor services; a current account deficit (including public transfers) below
6.0 percent of GDP; and a reduction in the number of people living beneath the poverty
line.

7. The government's strategy to accelerate growth and reduce poverty will be
fully elaborated in its forthcoming poverty reduction strategy paper (PRSP). As outlined in the
interim PRSP, the main sources of output growth in Malawi will be the agricultural sector and
the diversification of the economy toward the manufacturing, tourism, and mining sectors.

8. Private sector-led development, involving increased private
savings and capital formation, is a key element of Malawi's medium-term growth strategy. In this
regard, policies to bring about macroeconomic stability, lower fiscal deficits, and liberalize the
financial sector will be critical. In addition, policies aimed at ensuring competitive conditions in
all sectors, involving improvements in the transportation network and other parts of the
infrastructure, will play crucial roles. Remaining regulatory restrictions on the marketing of
grains and tobacco will be removed, and the government will maintain a liberal framework for
importing and marketing petroleumproducts.

9. To establish macroeconomic stability, fiscal discipline will be
forcefully implemented. This will contribute toward higher public savings and a sustained
reduction in inflation and real interest rates. The fiscal deficit (including grants) is projected to
move into surplus during the arrangement. Growth in the stock of broad money will be contained
below 10 percent per annum by the end of the program period by targeting reserve money,
while the kwacha exchange rate will continue to be market determined.

10. The medium-term fiscal program takes account of expected assistance
under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative) of
US$14.7 million in 2000/01, US$32.5 million in 2001/02, and
US$44.2 million in 2002/03. It is projected that debt-service relief will commence
in January 2001. In 2000/01, HIPC resources of US$6 million have been allocated for
purchases of drugs and teaching material. Once further priorities are identified during the PRSP
process, currently unallocated HIPC resources will formally be allocated to priority
areas.

11. The government will continue to broaden and deepen other structural
reforms by putting in place effective systems of expenditure control and monitoring;
ensuring that public money will be better spent by prioritizing recurrent government expenditure
through the use of the medium-term expenditure framework (MTEF); strengthening the Malawi
Revenue Authority's (MRA) capacity for revenue collection; furthering civil service reform;
continuing efforts to privatize commercial banks; and ensuring that a comprehensive financial
sector regulatory framework is in place. Given past experience with waste and fraud in
government, efforts will be intensified to improve accountability and governance. Measures will
be implemented to increase fiscal transparency and improve the provision of economic and
financial statistics. Social safety nets will protect the most vulnerable in society.

III. THE PROGRAM FOR 2000-01

A. Policy Strategy

12. The macroeconomic objectives for 2001 are as
follows:

real GDP growth of 3.0 percent;

a reduction of 12-month inflation to 10 percent by
end-December 2001;

an external current account deficit (including official transfers) in 2001 of
7.7 percent of GDP, which, after taking into account other expected external financing,
would allow gross external reserves to increase to 4.7 months of imports by end-2001;
and

a reduction in income inequality and poverty.

13. To achieve these goals, the following actions will be taken:

The rate of growth in reserve money will not exceed 27.6 percent in the year to
end-June 2001 and 13.8 percent in the year to end-Dec 2001.

Interest rates and the exchange rate will be allowed to adjust freely in order to meet the
program's monetary and international reserve targets.

Fiscal restraint will help to further bolster confidence, contain aggregate demand, and
maintain a competitive exchange rate while easing upward pressure on both nominal and real
interest rates. The overall fiscal accounts will be roughly in balance in 2000/01.

Spending will be prioritized.

The ongoing structural reforms will be deepened, widened, and more forcefully
implemented.

B. Monetary Policy

14. Broad money stock (M2) will remain the nominal anchor and the primary
tool for controlling inflation. Its 12-month growth rate will be reduced from 33.6 percent
at end-1999 to 20.9 percent at end-2000 and 16.8 percent at end-2001. To
achieve this, reserve money growth targets of 18.0 percent and 13.8 percent will be
pursued in the 12 months to the last quarters of 2000 and 2001, respectively. The principal
instruments to achieve these targets will be open market operations in Reserve Bank of Malawi
(RBM) and treasury bills.

15. Consistent with the use of money as the nominal anchor, the exchange rate
of the kwacha will be market determined, and the RBM's intervention will therefore be limited to
meeting the net official reserves target and smoothing exchange rate movements.

16. The reserve requirement on domestic currency deposits has, with effect
from June 1, 2000, been reduced from 35 percent to 30 percent and is
now assessed on a weekly-average basis. The high reserve requirements are imposing a heavy tax
on financial intermediation by increasing the spread between deposit and lending rates. The RBM
will therefore lower them further when liquidity conditions allow or will consider full or partial
remuneration.

17. The extent to which commercial bank deposits with the discount house are
eligible in meeting the reserve requirement has been limited to 25 percent of the total
requirement. This arrangement will be kept under review.

C. Fiscal Policy

18. A tight fiscal stance will be maintained in 2000-01. An overall
fiscal balance (on a cash basis) will be targeted for the fiscal year ending June 2001
(including grants) and 11.4 percent of GDP (excluding grants). The domestic budget
deficit1 will be reduced to 1.3 percent of
GDP in 2000/01.

19. Total spending on wages and salaries will increase by 41 percent in fiscal
year 2000/01 including a general wage increase, the implementation of a new housing
allowance scheme, the increased travel allowances for members of parliament (MPs), and the
introduction of contractual employment for top civil servants. While these measures will
decompress the wage scale, most civil servants will receive an increase in total remuneration,
including housing allowances, of at least 25 percent. MPs and ministers will receive the
same average increase in their salary and housing allowances as those civil servants not on
contract or currently in government houses.

20. Revenue will be enhanced through continued improvement in the
efficiency of the tax system and tax administration. The recently established MRA will be given
adequate incentives and a value-for-money audit will be conducted to assess its current
performance. Draft legislation for the extension of the surtax to the retail and wholesale stages
will be submitted to parliament by December 18, 2000.

21. Government expenditure will decline as a share of GDP, with nonpriority
expenditure further curtailed to increase outlays on antipoverty programs and, more generally, to
allow expenditure in social sectors to increase as a share of GDP. This reallocation will take
place within the context of the forthcoming PRSP and a strengthened MTEF.

22. To help achieve the targeted reduction in net spending, cost recovery
measures on administrative and public services will be implemented. Measures to reduce
expenditure will also be achieved through close monitoring of the consumption of utilities, a
reduction by one-fourth in the fleet of administrative and government vehicles, a substantial
reduction in the costs of local and external travel by government employees, and a review of
government representation abroad.

23. To ensure appropriate monitoring of government spending, public
expenditure management processes will be further strengthened. The new commitment control
system (CCS) that has been implemented this year will be fully operational by December 2000
and will permit assessment of the stock of outstanding commitments, improve budget and
cash-flow management, and avoid the recurrence of arrears. The government will ensure that,
starting with returns from December 2000, 100 percent of monthly returns under the new
commitment controls system will be received from line ministries by the Ministry of Finance.
The Auditor-General reported, on November 28, his assessment of the stock of central
government arrears as at the end of June 2000. These arrears and any contested claims that
are subsequently verified, will be cleared during the current fiscal year. Within six weeks of the
end of each quarter, the Auditor-General will verify the amount of any new arrears as at the end
of that quarter. His verification will include a reconciliation with CCS returns of each line
Ministry, and include specification of any disputed arrears. Any verified arrears will be cleared
within the quarter.

24. Other measures in this area will aim at

completing the withdrawal of government cash balances in commercial banks by the
end of this calendar year, as planned under the new Credit Ceiling Authorization
system;

implementing the Integrated Financial Management Information System (IFMIS) in
four pilot ministries by end-December, with a view to its subsequent extension to other ministries
by mid-2002; and

establishing a full internal audit function.

25. A proper monitoring of parastatals will be put in place by the recently
created Parastatal Enterprise Reform and Monitoring Unit in the Ministry of Finance. Among its
first actions will be the introduction of a quarterly report, including the overall debt position of
each of the major parastatals, and a cross-check of arrears between government and
parastatals.

D. Financial Sector Policies

26. Policies to develop and foster competition and efficiency in the primary
and secondary markets for government securities are being put in place. To this effect, the RBM
will, by end-December 2000, arrange for the removal of legal obstacles to full
implementation of a complete book-entry system.

E. External Policies

27. External sector policies will seek to reduce remaining barriers to trade and
rationalize the existing structure of tariffs. In line with its decision to join the Common Market
for Eastern and Southern Africa (COMESA) free trade area at its inception on October 31, 2000
the government has removed all duties from trade with other participants. The government will
also liberalize trade with other Southern African Development Community (SADC) members
under the free trade area launched in September 2000 and will consolidate commitments made
under the Cross-Border Initiative (CBI)--now the Regional Integration Facilitation Forum. The
government will move cautiously toward removing the remaining export surrender
requirements.

F. Competition Policies

28. Following the liberalization of tradein agricultural
products, the private sector has been expanding into retailing in agricultural products, an
area that used to be an exclusive preserve of ADMARC, the public distribution and marketing
agency. As a continuation of this policy, the government is considering a detailed, time-bound
plan for the commercialization and subsequent privatization of all of ADMARC's activities. It is
expected that preparation for full privatization will be completed by end-2002.

29. Large purchases of maize were made by the National Food Reserve
Agency(NFRA), largely using borrowed resources soon after its inception in 1999
during the bumper maize harvest. Much of this maize remains in storage. It is now clear that the
levels of stocks are far in excess of the nation's requirements for potential disaster and relief
operations. Strong efforts are being made to find additional domestic and/or international buyers
with the aim of reducing the level of stocks to 60,000 metric tons. As a consequence of a second
bumper crop in 2000, receipts from these sales will not cover NFRA's purchase and
storage costs. Expectations were that the NFRA would be capitalized with the assistance of the
international community but this has yet to be concluded. As NFRA is unable to service its debt,
it is seeking to reschedule part of the debt. The government will meet MK 356 million in interest
payments due in 2000/01. In future, the NFRA will confine its operations to disaster relief, with
holdings of maize limited to no more than 60,000 metric tons.

30. One of the great successes of the liberalization program in Malawi is the
rapid increase in smallholder production of tobacco, particularly burley tobacco. This
has been facilitated by the Intermediate Buyers (IB) system, which has permitted small growers
to take advantage of broader markets and has provided a source of cash for those with limited
access to credit. However, a deterioration in overall tobacco quality and increase in thefts have
been attributed to the weak regulation of the IB system. As a result, the government is
considering refining current licensing arrangements. This will, however, not result in any
restriction in access to marketing opportunities for small growers. In addition to these
modifications to the IB system, the government will consider the elimination of all restrictions on
the direct export of tobacco.

31. There have been major developments in the financial sector in
the last four years. A number of new banks have been licensed. However, the sector is still
dominated by two banks in which the government has a considerable financial stake, the National
Bank of Malawi and the Commercial Bank of Malawi. Much still needs to be done to promote
competition and efficiency in the financial sector. Accordingly, the authorities will

complete, by February 2001, an action plan to introduce a new comprehensive
financial sector regulatory framework that will cover nonbank financial institutions and markets;
strengthen banking and nonbanking supervision; improve loan classification, provisioning, and
insider-and connected-lending requirements; and reduce interlocking ownership of the two large
commercial banks;

resume efforts to find a strategic partner for the Commercial Bank of Malawi; and

ensure that no change in the ownership structure of the Commercial Bank of Malawi or
the National Bank of Malawi can be secured without adequate safeguards for all of their
customers.

32. In recent years, the Petroleum Control Commission (PCC) has
been importing all of the country's petroleum requirements. However, with effect from
May 2000, its role has been limited to that of regulating the petroleum market. This
change has had the following consequences:

All importation of petroleum products is now being handled by the private
sector.

Although a new company, ORTEX, was formed to take over the nonregulatory functions
of the PCC, including oil storage, it is now clear that oil distribution and marketing are not
appropriate activities for the public sector. Accordingly, ORTEX will be privatized by May
2002.

The automatic petroleum pricing formula agreed with the Fund staff in 1998 is
now being administered by a private sector committee under the chairmanship of the Malawi
Chamber of Commerce. The only discretion accorded to the government through the Ministry of
Finance is a two-week period in which to challenge the validity of the calculations.

G. Governance

33. Prima facie evidence indicates that corruption and fraud remain major
problems in Malawi. The government is fully committed to the prevention of fraud and
corruption and prosecution of all identified offenders. Furthermore, the government is committed
to supporting the work of the Anti-Corruption Bureau and the Auditor-General and is determined
to achieve good governance. In pursuit of this commitment, the government will

give all possible support to the Anti-Corruption Bureau (ACB) and the Director of
Public Prosecutions (DPP) in their investigations and potential prosecution of former officials of
the PCC implicated in the irregularities highlighted in the 1998 audit report on the PCC,
and take steps to recover misappropriated funds;

facilitate further action by the ACB and DPP in the cases of the disputed contract award
to SECUCOM to provide identity cards and the attempted procurement of Land Rovers through
Apex Motors;

by end-February 2001, pursue the recovery of at least MK 150 million in
cases of large-scale evasion of customs duties, together with appropriate penalties, and provide
adequate resources for investigation and prosecution of such cases, including associated
corruption issues;

ensure that any evidence of fraud or corruption revealed in the reports of the
Auditor-General is immediately pursued by the relevant investigating and prosecuting
authorities; and

consider further and, if possible, put in place mechanisms to accelerate the processing of
cases of fraud and corruption during 2001.

34. The government will improve safeguards against corruption and abuse of
office. To this effect, the government will during 2000-01

present a bill to parliament to amend the Finance and Audit Act so as to separate the two
functions of fiscal management and audit under new legislation;

establish, under the proposed new legislation, the independence of the Auditor-General;
and

present a bill to parliament to establish a new Procurement Code and Procurement
Authority that will decentralize procurement to the purchasing agencies.

H. Safety Net Strategy

35. The government is fully committed to the alleviation of poverty in Malawi
and has prepared, in consultation with civil society and with technical assistance from the World
Bank staff, a National Safety Net Strategy. One component of this will be targeted assistance to
low-income households to alleviate food insecurity. The "starter-pack" program
implemented in 1998/99 and 1999/00 has been streamlined in 2000/01 to
become a "Targeted Input Program" for lower-income households. In future years,
the targeting of this program will be further refined.

I. Statistics and Transparency

36. The Government and the Reserve Bank of Malawi will promote
transparency by disseminating adequate and timely information about the state of the economy
and the affairs and activities of the government. To this end,

the minutes of the monthly meetings of the Monetary Policy Committee are now being
published immediately after the following meeting;

the Reserve Bank will publish its monetary targets and data to assess its performance
against such targets;

the government will make available quarterly fiscal data, with a lag of not more than a
month, through its website;

the RBM will start providing monthly statistics on banking, finance and international
reserves, with a lag of not more than a month and with effect from not later than end-2000, on its
website;

the government will start providing quarterly reports on spending on high-and
low-piority programs on its website, starting with the third quarter of 2000 and with a target
publication date of one month after the end of the quarter; and

the Reserve Bank will continue to announce the amount of bills it offers for sale at
auctions.

37. The government considers that adequate and timely information and
statistics are indispensable to its policymaking and implementation. The government will,
therefore

develop, by mid-2001, an action plan for expanding the scope and improving the quality
of statistical information to include data on sectoral national accounts, medium- and small-scale
business activities, and local government finances;

develop, in the context of the National Safety Net Strategy, an action plan for expanding
substantially the scope of statistical information on poverty and antipoverty public actions,
intermediate targets, and objectives; and

38. The government has been trying to improve information coordination
among various interdependent ministries and departments. This is exemplified by the
establishment of the Debt and Aid Management Division; biweekly meetings of the technical
staff of the Ministry of Finance and Economic Planning, Reserve Bank of Malawi, and National
Economic Council (NEC) to review the accuracy of economic data; monthly meetings of the
National Economic Management Committee (principal secretary level); and monthly reporting of
information on economic program implementation to the Special Cabinet Committee on
Budgetary Measures. These steps will be taken further through the establishment of a high-level
Public Debt Management Committee, representing both the Ministry of Finance and Economic
Planning and the Reserve Bank, with responsibility for planning and coordinating public
debt-management strategy and monetary policy issues that jointly concern the two agencies; and
appropriate supporting committees. The Accountant-General will hold weekly meetings with the
Reserve Bank on cash-flow developments.

J. Program Monitoring

39. Indicative targets and quantitative performance criteria for the period
through end of June 2001 are presented in Table 1 and
structural benchmarks and performance criteria in Table 2.

40. There will be six semiannual program reviews. In addition to assessing
progress on macroeconomic stabilization, the first review will focus on the implementation and
operation of the new system of commitment and spending control. It will evaluate the
monitoring, prevention and clearance of arrears by central government. A further consideration
will be good governance. The review will seek to establish whether action has been taken to
collect tax revenues evaded from the government and to pursue charges against individuals for
which either the Auditor-General or ACB has produced evidence of fraud or
corruption.

Floors on the net foreign asssets of the monetary authorities4
(in millions of U.S. dollars)

121

126

180

Ceilings on the net domestic financing of the central
government5, 6

976

-3,880

-5,282

Clearance of new domestic budgetary arrears7

. . .

. . .

. . .

Ceilings on the stock of external arrears8

0

0

0

Ceilings on contracting or guaranteeing of external debt by the central
government and the Reserve
Bank of Malawi (RBM)

0

0

0

Medium and long term9

0

0

0

Short term10

0

0

0

Memorandum items:

Balance of payments support (in millions of U.S.
dollars)11

62

141

177

Transfers from the RBM to the central government

0

0

30

1The targets for end-December 2000 are performance criteria;
for end-March 2001 and end-June 2001, the targets are benchmarks. The targets are expressed
as cumulative changes from June 30, 2000, except for reserve money and net foreign
assets.2These ceilings are set as averages of monthly end-period
reserve money.3The ceilings will be adjusted downward (upward) to
reflect any decrease (increase) in the RBM reserve requirements on deposits.4The floors will be adjusted downward (upward) for any
shortfall (excess) of balance of payments support from its programmed levels,
up to a maximum of US$50 million.5The ceilings will be adjusted upward (downward) for
any shortfall (excess) of balance of payments support from its programmed
level, up to a maximum of US$50 million.6The ceilings will be adjusted downward (upward) for
any transfer in excess of (below) MK 30 million from the RBM to the central
government.7As defined in the technical memorandum of understanding,
paragraph 23.8Applicable on a continuous basis.9Excluded from the limit is the use of Fund resources;
adjustment lending from the World Bank, the African Development Bank and other
multilateral agencies; debt to restructure, refinance, or repay existing debts;
and concessional debts.10Includes debt with maturity up to and including one
year. These limits do not apply to any disbursements from (i) debts classified
as international reserve liabilities of the monetary authorities; (ii) debts to restructure,
refinance, or prepay existing debts; (iii) kwacha-denominated Treasury bills and Local
Registered Stocks held by nonresidents; (iv) normal import financing; and (v) export
performance guarantees by the RBM.11Cumulative from end-June 2000. Excludes HIPC Initiative
debt relief.

Confirmation by FAD that the new interim central government
expenditure-monitoring and control system is being effectively implemented, including the
maintenance of commitment registers and submission to the Ministry of Finance of monthly
reports on commitments and arrears by line ministries.

Establishment by November 2000 of a High-Level Public Debt Management Committee by
the Ministry of Finance and the Reserve Bank of Malawi and associated supporting committees.

Submission to parliament by December 18, 2000 of a bill to extend the surtax base to the
wholesale and retail stages.

II. Structural Performance Criteria

Compilation by the Ministry of Finance of monthly reviews, that (i) summarize the
monthly reports by line ministries on commitment levels and arrears and (ii) assess prospects for
meeting budget targets in 2000/01.

Commencement of full operations, by the end of December 2000, of a unit in the Ministry
of Finance to monitor the activities of parastatals, including quarterly borrowing returns and the
provision of annual accounts and completion of the first quarterly report on ten parastatals before
the end of 2000.

Avoidance of any new borrowing by the National Food Reserve Agency (NFRA).

III. Structural Benchmarks

Receipt from line ministries of 100 percent of monthly returns under the new
commitment control system, starting with returns from December 2000.

Dissemination of quarterly reports on spending on priority (poverty-related) programs
starting with the third quarter of 2000 and with target publication date of one month after the end
of the quarter.

Maintenance of uniform access by all growers to the tobacco sales network and
preservation of the intermediate buyers' system or equivalent mechanism.

Pursuit by official investigators and prosecutors of all evidence of fraud, corruption, and
misappropriation of public funds identified in the reports of the Auditor-General, particularly in
the cases of the Petroleum Control Commission (PCC) and public procurement.

Recovery, by February 2001, of at least MK 150 million of revenue lost through tax
evasion--and application of available penalties--as assessed by the Malawi Revenue Authority,
particularly in the case of large customs duties outstanding; and pursuit of any associated cases of
corruption.

Removal of legal obstacles preventing implementation of a complete book-entry system for
government securities before the end of 2000.

Formalization of the system for authorizing parastatal borrowing by April
2001.

Malawi: Technical Memorandum of Understanding

1. This memorandum sets out the definitions for quantitative performance
criteria and indicative targets under which Malawi's performance under the program supported by
a Poverty Reduction and Growth Facility (PRGF) arrangement will be assessed. Monitoring
procedures and reporting requirements are also specified.

I. Quantitative Performance Criteria and Indicative Targets

2. Performance criteria for December 31, 2000, and indicative targets for
March 31, 2001 and June 30, 2001 have been established with respect to

ceilings on the stock of reserve money;

floors on the level of net foreign asset of the monetary authorities;

ceilings on the cumulative net domestic financing of the central
government;

clearance of new domestic budgetary arrears of the central government;

ceilings on the contracting and guaranteeing by the central government or the Reserve
Bank of Malawi (RBM) of medium- and long-term external debt; and

ceilings on the contracting or guaranteeing by the central government or the RBM of
short-term external debt.

3. A performance criterion that is applicable on a continuous basis has been
established with respect to the ceilings on the stock of external arrears of the central government
and the RBM.

II. Institutional Definitions

4. The central government includes all units of government that exercise
authority over the entire economic territory. However, in contrast to the System of National
Accounts (SNA) and government finance statistics (GFS) standards, nonprofit institutions that
are controlled and financed by the central government are excluded for the purposes of this
memorandum.

5. The accounts of the monetary authorities include the balance sheet of the
RBM and the international reserves' holdings of the central government. 1

III. Limits on Monetary Aggregates

A. Reserve Money

6. A ceiling on the stock of reserve money applies. For the purposes of the
program, the stock of reserve money for the quarter will be calculated as the arithmetic average
(mean) of the stock of reserve money at the last day of each calendar month comprising the
quarter.

7. Reserve money consists of currency issued by the RBM and balances of
commercial banks accounts with the RBM. This includes required reserves held for kwacha
deposits and any other domestic currency-reservable liabilities and other demand and time
deposits held with the RBM.

8. Adjusters. The ceiling on the stock of reserve money will be
adjusted downward for a decrease in the reserve requirement ratio and the ceiling will be
adjusted upward for an increase in the ratio. For each month of a particular quarter, the following
calculation would be undertaken: 0.75 multiplied by (the program baseline required
reserve ratio minus the new required reserve ratio) multiplied by the amount
of reservable deposit liabilities in commercial banks as at the end of the previous calendar
month.2 The adjustment for each month would be
summed up and divided by three before being applied to the performance criterion for the
respective quarter.

B. Limit on Net Foreign Assets of the Monetary
Authorities

9. A floor applies to the level of net foreign assets (NFA) of the monetary
authorities.

10. NFA will be valued in U.S. dollars at actual end-of-period
exchange rates. Monetary gold will be valued at the fixed RBM accounting rate.

11. NFA will be calculated as the difference between gross international
reserve assets and international reserve liabilities.

12. Gross international reserve assets of the monetary authorities are
defined as the sum of

monetary gold holdings of the RBM;

holdings of SDRs;

Malawi's reserve position in the IMF;

central government (treasury) holdings with crown agents; and

foreign currency assets in convertible currencies held abroad that are under the direct and
effective control of the RBM and readily available for intervention in the foreign exchange
market or the direct financing of balance of payments imbalances and are of investment grade or
held with an investment-grade institution.

Excluded from the definition of gross reserves are any foreign currency claims on
residents, capital subscriptions in international institutions, assets in nonconvertible currencies,
and gross reserves that are in any way encumbered or pledged, including, but not limited to,
reserve assets used as collateral or guarantee for third-party external liabilities.

13. International reserve liabilities of the monetary authorities are
defined as the sum of

outstanding liabilities of the RBM to the IMF; and

any foreign convertible currency liabilities of the RBM with an original maturity of up to
and including one year.

Excluded from the definition are liabilities arising from balance of payments support of
original maturities of more than one year.

14. Adjusters. The floor on NFA will be adjusted upward, up to a
maximum of US$50 million, for balance of payments support (including grants and loans)
in excess of the programmed level as set out in the table on quantitative performance criteria. The
floor on NFA will be adjusted downward, up to a maximum of US$50 million for balance
of payments support (including grants and loans) falling short of the programmed level as set out
in the table on quantitative performance criteria.

IV. Limit on the Net Domestic Financing of the Central
Government

15. A ceiling applies on the net domestic financing flows of the central
government (NDFCG) measured cumulatively from June 30, 2000.

16. NDFCG are defined as the sum of the change in the stock of net
credit from domestic banks, nonbanks, the change in domestic payment arrears, and privatization
proceeds from government assets that accrue to the central government.3

17. Net credit from domestic banks is computed as the sum of (i) net
borrowing from the RBM (ways and means advances, loans, holdings of local registered stocks,
and holdings of treasury bills minus deposits), (ii) net borrowing from commercial banks
(holdings of local registered stocks, holdings of treasury bills minus deposits), and (iii) holdings
of promissory notes. The treasury bills and local registered stocks are valued at their purchasing
prices. Excluded are holdings of treasury bills issued by the RBM for monetary
operations.

18. Net credit from domestic nonbanks includes (i) holdings of local
registered stocks by the private sector and other financial institutions, (ii) holdings of Treasury
bills by the private sector and other financial institutions, (iii) supplier credits, and (iv) holdings
of promissory notes. The treasury bills and local registered stocks are valued at their purchasing
price. Excluded are holdings of treasury bills issued by the RBM for monetary
operations.

19. Domestic budgetary arrears are defined as the sum of the changes
in the stock of domestic arrears from their level as at June 30, 2000, of MK389 million4 and the net accumulation of new budgetary arrears during
the current fiscal year.

20. New budgetary arrears are defined as those payments delayed on central
government commitments during the current fiscal year, including on wages and salaries,
pensions, transfers, domestic interest, goods and services, and payments to the Malawi Revenue
Authority (MRA) for tax refunds. Payments on wages and salaries, pensions, and transfers are in
arrears when they remain unpaid for more than 30 days beyond their due date.5 Domestic interest payments are in arrears when the
payment is not made on the due date. Payments for goods and services are deemed to be in
arrears if they have not been made (i) within 30 days of the date of invoice, or--if a grace period
has been agreed--(ii) within the contractually agreed grace period. Payments by the Ministry of
Finance to the MRA for the purpose of tax refunds are in arrears if the payment has not been
made within 30 days after the claim has been made.

21. Adjusters. The ceiling on NDFCG will be adjusted upward--up to
a maximum of the kwacha equivalent of US$50 million--for any shortfall of balance of payments
support from its programmed level as set out in the table on quantitative performance criteria.
The ceiling on NDFCG will be adjusted downward - up to a maximum of the kwacha equivalent
of US$50 million - for any excess of balance of payments support over its programmed level as
set out in the table on quantitative performance criteria. For purposes of the program, the adjuster
will be calculated using the average U.S. dollar-kwacha exchange rate during the respective
calendar quarter in which the shortfall was experienced.

22. The ceiling on NDFCG will be adjusted downward for any transfer over
the program baseline from the RBM to the central government and upward for any
shortfall.

V. Clearance of New Domestic Budgetary Arrears of the Central
Government

23. Should at any time during the program new domestic budgetary arrears of
the central government (as defined in paragraph 20 above) be verified, then the government will
clear these arrears by no later than the end of the fiscal quarter following the fiscal quarter in
which these arrears were accumulated.

VI. Limits on External Debt

A. Limit on Medium- and Long-Term External
Debt

24. A ceiling applies to the contracting and guaranteeing by the central
government, the RBM, or other agencies on behalf of the central government on debt with
nonresidents with original maturities of over one year. The ceiling applies to debt and
commitments contracted or guaranteed for which value has not been received. The ceiling is
measured cumulatively from June 30, 2000.

25. The definition of debt, for the purpose of the limit, is set out in Executive
Board Decision No. 6230-(79/140), Point 9, as revised on August 24, 2000 (see
Annex).

26. Excluded from the limit is the use of Fund resources; adjustment lending
from the World Bank, the African Development Bank and other multilateral agencies; debts to
restructure, refinance, or prepay existing debts; concessional debts; and any kwacha-
denominated treasury bill and local registered stock holdings by nonresidents.

27. For program purposes, a debt is concessional if it includes a grant element
of at least 35 percent, calculated as follows: the grant element of a debt is the difference between
the net present value (NPV) of debt and its nominal value, expressed as a percentage of the
nominal value of the debt (i.e., grant element is equal to (nominal value minus
NPV) divided by nominal value). The NPV of debt at the time of its disbursement is
calculated by discounting the future stream of payments of debt service due on this debt. The
discount rates used for this purpose are the currency specific commercial interest reference rates
(CIRRs), published by the OECD. For debt with a maturity of at least 15 years, the
ten-year-average CIRR will be used to calculated the NPV of debt and, hence, its grant element.
For debt with a maturity of less than 15 years, the six-month average CIRR will be used. For the
purposes of the program through July 2001, the CIRRs published by the OECD in July 2000 will
be used. For example, based on July 2000 CIRR rates, a U.S. dollar-denominated debt with a
10-year maturity would be considered concessional if the interest rate did not exceed
3 percent.

B. Limit on Short-Term External
Debt

28. A ceiling applies to the contracting and guaranteeing by the central
government, the RBM, or other agencies on behalf the central government of debt with
nonresidents with original maturities of one year or less. The ceiling applies to debt and
commitments contracted or guaranteed for which value has not been received.

29. The definition of debt, for the purpose of the limit, is set out in Executive
Board Decision No. 6230-(79/140), Point 9, as revised on August 24, 2000 (see Annex).

30. Excluded from the limit are (i) debts classified as international reserve
liabilities of the RBM; (ii) debts to restructure, refinance, or prepay existing debts; (iii)
kwacha-denominated treasury bills and local registered stocks held by nonresidents; (iv) normal
import financing; and (v) export performance guarantees by the RBM. A financing arrangement
for imports is considered to be "normal" when the credit is
self-liquidating.

VII. Limit on External Payment Arrears

31. A continuous performance criterion applies on the nonaccumulation of
external payment arrears on external debt contracted or guaranteed by the central government or
the RBM. External payments arrears consist of external debt-service obligations (principal and
interest) that have not been paid at the time they are due, as specified in the contractual
agreements.

VIII. Reporting

32. The authorities have committed themselves to using the best available data,
so that any subsequent data revisions will not lead to a breach of a performance criterion. All
revisions to data will be promptly reported to the Fund staff, particularly when the changes are
significant. The likelihood of significant data changes will be communicated to Fund staff as
soon as the risk becomes apparent to the authorities. All data will be reported electronically in the
format and frequency set out below and within the period specified.

33. Subject to technical capacity being sufficiently built up, the RBM will
commence reporting on a daily basis within one day, gross reserves, net interventions
of the RBM in the foreign exchange market, reserve money, interest rates on standing facilities
and market operations, net volume on open market operations, results of treasury bill auctions,
and secondary market prices of outstanding treasury bills (reporting agency:
RBM).

34. On a weekly basis within five working days of the end of the
respective week, the balance sheet of the monetary authorities in the format specified for Table 1
will be reported (reporting agency: RBM).

35. On a monthly basis within 30 working days of the end of the
respective month, the monetary survey (Table 2), the monetary authorities' accounts (Table 3),
the commercial banks' accounts (Table 4), the international reserves position (Table 5), local
registered stock holdings (Table 6), treasury bill holdings (Table 7), central government domestic
borrowings (Table 8), central government foreign borrowings (Table 9), guarantees extended by
the RBM or central government on foreign operations of Malawian residents (Table 10), interest
rates (Table 11), exchange rates (Table 12), and the consumer price index (Table 13) will be
reported in the format agreed for those tables (reporting agency: RBM).

36. On a monthly basis within 45 calendar days of the end of the
respective month, the fiscal accounts of the central government (Table 14), the borrowings of the
ten major parastatals, and reviews summarizing achievement of commitment levels and arrears
will be reported in the agreed format (reporting agency: Ministry of Finance).

37. On a quarterly basis within 45 calendar days of the end of the
respective calendar quarter, central government reports on spending on priority (poverty-related)
programs will be transmitted (reporting agency: Ministry of Finance).

38. On a quarterly basis within 45 calendar days of the end of the
respective calendar quarter, a report on performance under the program will be transmitted
(reporting agency: RBM and Ministry of Finance).

1The counterpart entry to the central government's international reserve assets will
be classified as "net credit to central government."2The adjustment factor of 0.75 reflects the provision that allows 25 percent of
reserve assets to be held with a discount house (Continental Discount House).3Some receipts from the privatization of parastatals have been split between the
central government and the holding companies of the former parastatals at a ratio of 80:20. Only
those receipts that accrue directly to central government constitute financing of the central
government.4The Auditor-General reported on November 28, 2000 outstanding arrears as at
end-June, 2000 of MK554 million. However, this included MK165 million, which had been
cleared already through special treasury bills.5Pension benefits that are being assessed following retirement are not considered in
arrears.